Editor's pick: Originally published Jan. 15.
The crude oil market has gone crazy -- and it's taking stocks along with it.
The question now is: when will oil hit bottom?
The bad news from your "oil guy" is that once the oil market has gone "parabolic" -- either up or down -- picking a bottom (or a top) is a frankly useless exercise.
The only insight I can give you is a comparison to the last time oil went bat-nuts crazy, and it's not a happy one -- in 2008, when it traded over $140.
That's right, the only real parallel I have to the current action in oil is when oil unhinged itself on the upside. In that case, just like this one, all the fundamentals in the world couldn't explain an oil market that was pricing itself over $120 a barrel.
Sure, people talked about the seemingly endless appetite for oil coming from emerging markets, including China and India. They talked about increasing supply-chain problems that could emerge from the instability in Iraq and Iran. They even mentioned the idea of "peak oil" a lot, where we'd literally run out of fossil fuels while demand was skyrocketing.
But none of that could possibly explain a futures market price that was increasing a dollar or two a day, while official target prices in OPEC were still well under $70 a barrel.
And you could feel it then -- as oil screamed past $110 a barrel in March, there was no rhyme or reason left in the market. Only momentum players, speculators and hedge funds jumped in on a market that was getting juiced. No one needed a reason -- there was money to be made.
Today, there are lots of fundamental reasons being used to try to explain oil dropping below $40 a barrel: huge surpluses, an increase in OPEC production from Saudi Arabia and Iran to come, U.S. producers who are managing to hang on despite extreme negative cash flows and back-breaking debt loads.
I don't care. This is just like 2008, but in reverse: nothing fundamental can explain an oil market now trading under $30 a barrel.
There is however, the exact same group pushing the market down today that was responsible for the move up in 2008 -- the same momentum players, hedge funds and speculators who all smell a dollar to be made on a market that's gone parabolic.
With that group in current control of oil prices, trying to pick a bottom is more than impossible -- it's meaningless. The market will stop going down when the selling stops. Period.
What I can give you, perhaps, is a time frame. In 2008, we could feel the oil markets on the floor go into "silly mode" and disconnect from reality in the early spring, as prices moved above $110 a barrel. Prices didn't peak until early July at $145.
I believe that oil under $40 represents an equivalent disconnect from fundamental economics, even economics as bleak as the current supply glut of oil today. We breached that level in early December, and since then, I believe that oil has had all the signs of an equivalently "parabolic" market.
A bottom price? That's impossible to guess at. But a time frame for this move? Well, if 2008 is any guide, we could have possibly another three months of very volatile moves in oil before a bottom is truly set.
Everyone will jump over each other to claim to have seen the bottom, only to see it knocked out again the next day. And if the patterns of 2008 in oil hold true, that could mean a far worse outcome for stocks. No one has to be reminded what happened to stocks in the fall of 2008.
At the very least, there's a very scary next three months for oil -- and therefore probably stocks.